Class A Demand Stabilizes Office Sector

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The office sector continues to struggle amid the ramifications of the COVID-19 health crisis. But the many companies seeking top-notch office accommodations are helping to push the sector toward stabilization, according to the NAIOP Research Foundation’s new second quarter 2022 NAIOP Office Space Demand Forecast.

The current statistics are somewhat of a mixed bag, but overall the predictions for the future are optimistic. In the first quarter of 2022, the national office vacancy rate rose for the 10th consecutive quarter. NAIOP believes, however, that the increase in the first three months of the year is most likely attributable to the delivery of new properties vs. a significant retreat in leasing among office users.

While vacancies continue to rise, Class A buildings are helping to increase absorption in markets across the country as businesses seek quality office space to assist in their goal of attracting and retaining skilled employees. The pursuit of premier workspace appears to be a formidable force in the office sector.

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According to data from Kastle Systems, office occupancy across 10 key cities reached 43.4 percent on April 27, 2022, its highest level since the start of the pandemic in March 2020.

“Leasing activity is up compared with the same period last year, which signals that firms are more comfortable making longer-term commitments to office space,” according to the NAIOP report. “Property owners have been willing to offer greater tenant improvements to encourage signing, indicating that tenants still have the upper hand in lease negotiations. These signals indicate a move toward a more stable equilibrium as the office market finds its balance.”

The workspace crystal ball

Looking ahead at the remaining three quarters of 2022, NAIOP anticipates that absorption in the national office market will continue to be positive and reach a total of 46.9 million square feet. The outlook for the following year appears bright as well, with a forecast of 47.3 million square feet of total positive net absorption for 2023.

Many factors bode well for the office sector’s ongoing progress, including the relatively low 3.6 percent unemployment rate, and the addition of jobs to the largest office-using industries: finance, professional and business services and information. “Continued employment growth in these industries should support office leasing activity in coming months,” as per the NAIOP report.

On the other hand, there are also factors that will continue to hinder the office sector. As noted in the report, the current labor shortage and remote work/hybrid work arrangements will have an ongoing impact on the demand for office space.